The Medium-term Outlook for the Yellow Metal

There are a lot of words in the dictionary to describe what you need these
days to be a gold investor: patience, endurance and fortitude are some of them.
Recently investors were beginning to lose their staying power. But, in the
past, it has often worked out that just as investors' patience runs out, gold
comes charging in.

Sentiment towards gold is so low that you can scrape the floor with it. Two
weeks ago gold exchange-traded funds suffered their largest outflow since January
2011 with gold falling on Friday as low as $1572.80. The world's largest gold-backed
exchange-traded fund, SPDR Gold Trust, reported its fourth successive daily
outflow last Monday. The sell-off since the start of the year is mostly due
to a perceived improvement in the global economic outlook and concerns on the
longevity of the Fed's quantitative easing.

Comments by top Fed officials made two weeks ago, suggesting the U.S. central
bank could reduce or halt its asset buying had put heavy pressure on gold prices.
Also two weeks ago, data released by the Commodity Futures Trading Commission
showed hedge
funds and other investment managers were shorting gold in record numbers.
The number of bearish contracts held by professional speculators reached above
90,000 for the first time since mid-1999. It is ironic to juxtapose that with
the rosy picture 10 years ago this month when the number of bullish contracts
held by professional speculators first broke above 100,000 contracts.

Investors without the qualities mentioned above - patience, endurance and
fortitude - have already been shaken out of the market. The pool of sellers
is dwindling into a pond.

Forbes
Magazine ran an interesting piece this week quoting a Time Magazine article:

"To hoarders and speculators gold lately has had about as much luster as a
rusty tin can."

The article itself is a bit rusty. The
Great Gold Bust ran in August 1976 right at the bottom of a 50% retreat
in the 1970s gold bull market. It had been only 19 months since gold purchases
became legal for U.S. citizens and, according to the article, "the price
has fallen more than 40% from its peak of $198 an ounce. In three chaotic
days of trading last week, gold fell $14 on the London market, reaching a
31-month low of $105.50 an ounce. Though the price recovered to $111 by week's
end, that is still a dismal figure for goldbugs, who not long ago were forecasting
prices of $300."

Wow. $300. It's almost funny to read today.

It's often when sentiment is at its nadir that gold becomes turbocharged.
After the Times article, gold proceeded to gain 750% over the next three and
a half years.

Gold looked very good last Tuesday when it posted the biggest gain of the
year, up 1.3 percent, on Bernanke's reassurance of continued monetary accommodation
combined with Italy's uncertain political and economic future. Gold broke above
$1,600 an ounce, extending its rally to a fourth straight day. Italy's problems
raise uncertainty about the viability of Europe's single currency. The unemployment
rates for youths in Spain, Portugal and Greece are approaching 50% and that
may spell trouble this summer. Italian elections failed to show a clear winner
indicating that voters reproached the present government's austerity measures.
It also suggests political instability in Italy in the coming months. Flight-to-safety
buying of U.S. Treasuries, German bunds, gold and the U.S. dollar became the
thing to do . Bernanke delivered the central bank's semiannual testimony
to the Senate Banking Committee sending a strong signal that he backed the
continuation of the $85 billion bond-buying program.

The market largely ignored a cut of more than $200 in the gold price outlook
by Goldman Sachs, one of the top global bullion banks. The bank reduced its
2013 gold price forecast to $1,600 an ounce from $1,810, citing bullion's recent
price drop and an increase in U.S. real interest rates.

For those who have recently bailed out of gold it may have the allure of a
rusty tin can, but for us, it still has its timeless allure, that special something
that has made it a store of value for centuries and millennia. To see what
is in store for the yellow metal in the near future let's begin this week's
technical part with the analysis of its long-term chart (charts courtesy by http://stockcharts.com.)

In the chart, we see that the RSI
level is extremely oversold and at levels very similar to what was seen
in 2008. At no other time in this bull market has the situation been as
oversold. This is one good reason for considering long positions in gold
as opposed to short.

We still see a continuation of two weeks ago when gold bounced off the declining
medium-term support line and no breakdown was seen. Last week, back and forth
price movement was seen but still no breakdown, so the situation remains bullish
for the medium term.

Let us see how the situation looks like from the non-USD perspective.

Recall that in our essay from a week and a half ago we stated that the
breakdown had been invalidated. Prices did pull back and rally last week,
but overall, on average, the price in non-USD currencies is now clearly above
the medium-term declining support line. The breakdown has been invalidated
and the picture remains bullish.

Finally, let us have a look at gold from the British Pound perspective.

In this chart we have a situation even more bullish than in the previous one.
The consolidation has continued, and prices are clearly above the declining
resistance line. The consolidation began last October, and the situation remains
bullish; prices are expected to move to the upside. It's good to remember the
saying that, "the longer the base, the stronger the move". The consolidation
lasted for a long time so the coming rally will likely be significant. The
consolidation is exceptionally visible.

The reason a lengthy consolidation often leads to a significant rally is that
many investors stay on the sidelines or continue to leave the market while
the consolidation plays out. This keeps the consolidation in place to some
extent until something finally triggers a move to the upside to signal that
the consolidation is about to end. Then an influx of capital from the sidelines
quickly drives the price even higher. With longer consolidations, more investors,
and thus capital, is waiting on the sidelines and can fuel following move.

This is what we have on the precious metals market now - combined with discouragement.
Since the fundamentals are on our side, this creates a significant potential,
just waiting to be triggered.

Summing up, the long- and medium-term outlook remains bullish for the
yellow metal and it seems that the long-awaited rally will probably begin soon.
Most of this week's charts remain bullish and indicate that the overall situation
for gold is improving.

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Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who
takes advantage of the emotionality on the markets, and invites you to do
the same.

His company, Sunshine Profits, publishes analytical software that anyone can
use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem
that may never be solved, PR has changed the world of trading and investing
by enabling individuals to get easy access to the level of analysis that
was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are
results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals
sector. For that reason it is his main point of interest to help you make
the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for
professional excellence and ethics for the ultimate benefit of society.

Disclaimer: All essays, research and information found above represent
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